Infosys – Is the Giant Slowly Dying?

Posted in Operations & IT Articles, Total Reads: 2504
, Published on 23 September 2012

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The question has been flying around in the IT industry circles for quite some time now. There has been an array of contradictory reports in favor of and opposing the industry bellwether. Situation has been made murkier by the CEO’s statements with little conviction on different issues. To say whether the company is moving in the right direction has become a mammoth task for the stake holders. Even for someone with perfect insider information on the company it is quite difficult to answer that with some degree of rationale.

There are different ways of looking at the current situation. One is adopting the time-tested approach of focusing on the financials of the firm and then arriving on the future prospects of the company. The other method is mostly relying on the employee perspective on the firm. Even though it is quite difficult to substantiate that with facts and figures, as someone who has work experience in more than one industry major, my own personal opinion is that this method is definitely something that has to be reckoned with.

Employee Perspective

As an industry with little to boast about when it comes to employee loyalty and attrition rates, it becomes imperative for a company to retain the existing workforce at any cost. If Infy continues to go ahead with the current policy of no wage-hikes, it would be too difficult to stop the erosion of talent pool. In the modern work life, where job satisfaction and emoluments have a positive linear relationship, it is nothing less than a felony to adopt a no-wage hike policy. Consider the angst of an employee who had worked day in and day out on the project just to know that he and his merry-go-round colleague got the same wage hike.

To add to his woes, there is always the farce of giving promotions with no salary hikes attached. When there are ample number of small and big players waiting outside to have a share of the pie, with attractive packages and incentives, it is hard for an employee to remain in the organization, unless tied up with some commitments.

Financial Perspective

A detailed analysis of the financials of the firm is expected to throw some light on its future prospects. Comparison of the company with other players of same class in the industry on various fronts would definitely bring out the positives and flip sides. Infy comes out in flying colors in many of the tests, where as it is at the receiving end in many. Nevertheless current investor sentiment has been horrendous, thanks to below par performance for the past seven quarters. Following have been found to be the major reasons why Infy would struggle to be an investor’s blue eyed boy again in the near future.

Attrition rates: On realistic terms, an IT company can never hope to have the same attrition rates of a manufacturing or an FMCG firm. But certain level of employee retention is quintessential for the overall well-being of the firm. The hard fact in the industry is that the corporate incur mammoth costs for training the new recruits. To replace an experienced employee with a fresher and fine tune his skills to suit the project requirements is a process which calls for a huge investment in both time and money. A quick peep into the attrition data of the four industry biggies shows that TCS wins over others hands down. With attrition rates of around 16%, Infy really lags behind its peers in this area. The attrition data of all the 4 players are given:

COMPANY

ATTRITION RATES

TCS

13.1%

Wipro

15.6%

HCL

14.0%

Infosys

16.0%

Growth: This is another area where Infosys cuts a sorry figure, when compared to its competitors. When TCS and HCL posted impressive percentage growth (QoQ) in most fronts, Infy was struggling to keep up with the expectations. Of the last 8 quarters, Infy story has been that of investor disappointment and subsequent nose-dive in share prices. The parameters which were taken into consideration on growth front are : Revenue, EBITDA, Volume, Pricing and Revenue from FMCG segment (All data on QoQ basis). The detailed comparison is given below:

Quarter on Quarter Growth in Percentage

Particulars

HCL

TCS

Wipro

Infosys

Revenue Growth

2.6

2.4

2

-1.9

EBITDA Growth

-1.1

-4.4

-0.11

-5.7

Volume Growth

2.9

3.2

0.8

-0.6

Pricing Growth

1.4

1.6

0.7

1.1

Revenue Growth from FMCG

-4.1

-2

-1.1

-4.6

Quarterly guidance: Providing quarterly guidance and never sticking on to those numbers is the trend that has been observed in Infy quarterly results for quite some time now. The sad part is that the quarterly guidance given by the company in the recent quarters itself is way below compared to NASSCOM figures. For Q1 (Apr – June 2012), company guidance was for 8 – 10% and NASSCOM figures were 11 -14%, where as the final figures achieved were somewhere around 5.5%.To add insult to injury, for the coming quarter, company has not even given any guidance numbers. It is a hard fact that TCS has been able to beat the NASSCOM numbers with ease, where as Infy has been struggling even to meet its own modest estimates.

Discretionary spending: Discretionary spending of the clients is yet another factor which has attributed to the current downfall of the firm. This is that form of spending by the clients, which could be postponed to a later stage. Compared to the other industry peers, the amount of discretionary spending Infy clients have is slightly on the higher side at around 64%. This feature, coupled with the over-dependence on BFSI sector for revenues would make it extremely difficult to sail through in tough economic conditions. Moreover the lack of client confidence regarding the flawless execution of projects would further accentuate the menace of discretionary spending. Below table indicates the BFSI numbers of Infosys and TCS for the past 4 quarters.

Q2 (FY 2011-12)

Q3 (FY 2011-12)

Q4 (FY 2011-12)

Q1 (FY 2012-13)

Infosys

34.50%

34.70%

34.30%

34.30%

TCS

43.50%

43.30%

42.20%

43.00%

As discussed, company has a number of factors lined up against the future growth. But the scene is not as bleak as it appears right now. It would be grievous injustice to write off a firm just based on a few quarterly performances. Company has an enviable legacy, and it has all in its repertoire that is required to thrive in this adverse environment. It can still be the darling of the dalal street.

On close analysis, there are certain major factors which would guarantee the sustenance of the company on a long term basis. The most important of them are discussed here:

Valuation: With all fairness, one can say that the company is definitely at an advantage when it comes to the valuation front. Currently the scrip is highly undervalued in the market. The P/E (Price to Earnings Ratio) of Infy is around 14, where as those of TCS and HCL are well above 18. This means that Infy share has every chance of improving its current market value of close to INR. 2200. Whereas, TCS, its closest competitor currently trading at around INR 1200/ share, is expected to reach a stagnation level with regard to the share prices. The P/E ratios of Infosys, TCS, Wipro and HCL as on 1st August, 2012 are as follows:

Infosys

TCS

HCL

Wipro

P/E

14.09

20.54

18.48

18

Long-term strategic growth: Infy has been going through a transition phase currently. The business model is slowly getting transformed from Infosys 2.0 to Infosys 3.0. The impetus would be on long term strategic growth in this model. Unfortunately, the transformation is happening at a point in time, where the global economy is completely in tantrums. But the top management in the firm remains totally upbeat about the model and its future prospects. Mr. Shibulal, CEO & MD, has been stressing on the advantages of using such a model for the clients, as well as for the firm. On a longer horizon, company is expected to reap rich dividends once the model gets successfully implemented.

Presence of Finacle: Finacle is unarguably the best core banking software provided by the Indian software firms. In spite of the emergence of BanCs from TCS, finacle has created its own niche in the area of core banking solutions. It won the first place in the Core Banking Technology Provider of the year at the Banker’s Innovation in Banking Technology Awards, 2012. Moreover the company is currently in the process of developing the 11th version of the software, whereas at present mostly 8th and 9th versions are used by the banking industry. This proves beyond doubt that company is way ahead in terms of long term vision in case of handling of Finacle. Moreover even in the last quarter, when the company did not meet the street expectations, it was able to establish solid relationships with high potential clients, thanks mostly to Finacle. Zeno Bank was one of those clients which confirmed its long term association with Finacle.

Addition of new clients: Addition of new clients has been another striking feature of Infy, amidst all the gloom. A whopping 51 clients were added in the recently concluded quarter, in which company was largely finding it hard to strike right chord with the stake holders. During the same period, TCS, the closest competitor of Infosys was able to add only 42 new clients. A comparison across the 4 players in this front is given in the below table:

Infosys

TCS

HCL

Wipro

Number of new clients

52

42

52

41

Profit growth: In spite of all the disappointments regarding revenue growth, guidance numbers etc, Infy has always been the front-runner when it comes to profit growth. In the recently announced results also, it recorded a profit growth of 33% (QoQ), which was matched only by TCS. Moreover the amount of cash the company has at its disposal is so huge that, it could undoubtedly be said that it can go ahead with its acquisition plans whenever opportunity arises. As per the company balance sheet (2011-’12), total cash reserves is around INR 19557 crores, a figure much more than that of its peers.

It is too difficult a task to predict the fate of the company at this point in time. But at least based on the analysis we did and historical performances, current phase is just a blip in the super success story of this heavy weight. It is hoped that in the near future itself the gloom gives way to glee for all the stake holders in Infy.

This article has been authored by Midhun S Madhu from Loyola Institute of Business Administration.